World stocks shrivel as trade truce doubts, eco­nomic woes gather

De­flat­ing hopes of a swift res­o­lu­tion to the Sino-U.S. trade war knocked world stocks off three-week highs on Tues­day, while grow­ing fears the U.S econ­omy could be headed for re­ces­sion sooner than ex­pected weighed on the dol­lar.

The rap­proche­ment be­tween U.S. Pres­i­dent Don­ald Trump and China’s Xi Jin­ping at the week­end G20 meet­ing had fired up mar­kets on Mon­day. But the up­beat mood quickly dis­si­pated on skep­ti­cism that Wash­ing­ton and Bei­jing can re­solve deep-seated dif­fer­ences on trade in the agreed three-month ne­go­ti­at­ing win­dow.

Adding to mar­ket woes, was an in­ver­sion of the short end of the U.S. yield curve which raised the specter of a pos­si­ble U.S. re­ces­sion.

“The ini­tial re­lief rally was never go­ing to last. In­vestors need more de­tail now in or­der for that risk on sen­ti­ment to sur­vive,” said Jasper Lawler, head of re­search at Lon­don Cap­i­tal Group. “So far that de­tail has not been com­ing through and in­vestors have more ques­tions than an­swers.”

There was con­fu­sion over when the

90-day pe­riod, dur­ing which the U.S. and China would hold off on im­pos­ing more tar­iffs, would start. A White House of­fi­cial said it started on Dec. 1, while ear­lier, White House eco­nomic ad­viser Larry Kud­low told re­porters it would start on Jan. 1.

More­over, none of the com­mit­ments that U.S. of­fi­cials said had been given by China - in­clud­ing re­duc­ing its 40 per­cent tar­iffs on au­tos - were agreed to in writ­ing and specifics had yet to be ham­mered out.

Mean­while the U.S. yield curve fo­cused in­vestors’ minds. The curve be­tween U.S. three-year and five-year and be­tween two-year and five-year pa­per in­verted on Mon­day - the first parts of the Trea­sury yield curve to in­vert since the fi­nan­cial cri­sis, ex­clud­ing very short-dated debt.

An­a­lysts ex­pect the two-year, 10-year yield curve - seen as a pre­dic­tor of a U.S. re­ces­sion - to fol­low suit.

On Tues­day, the yield on bench­mark

10-year Trea­sury notes was at 2.95 per­cent com­pared with its U.S. Mon­day close of

2.99 per­cent. And the spread be­tween

10-year and two-year Trea­sury yields tight­ened to around 13 ba­sis points - hit­ting its nar­row­est level since July 2007.

“The fo­cus is now shift­ing to the in­verted U.S. bond yield curve which has nega­tive con­no­ta­tions, while im­ply­ing the U.S. econ­omy is head­ing to­wards what was only a few weeks ago an im­prob­a­ble eco­nomic slow­down,” said Stephen Innes, head of trad­ing for APAC at Oanda.

“Now, even re­ces­sion­ary fear is start­ing to raise its ugly head.”

How­ever, an­a­lysts said U.S. man­u­fac­tur­ing data re­leased on Mon­day pointed to a stronger eco­nomic out­look, with new or­ders a “key driver” in boost­ing ac­tiv­ity.